IBM selloff: Infosys, Wipro ADRs tumble; why Persistent Systems, other IT stocks are in focus

Weaker-than-expected preliminary second-quarter results by IBM sent technology stocks tumbling in the US overnight, with ADRs of Infosys Ltd and Wipro Ltd also settling 3-4 per cent lower, hinting at a negative start of IT stocks such as Persistent Systems Ltd, Tata Consultancy Services Ltd (TCS), HCL Technologies Ltd and Tech Mahindra Ltd.

IBM plunged 26 per cent, which was its biggest intraday loss since at least January 3, 1968. The stock eventually settled at $217.07, still down 25.21 per cent. In a letter to shareholders, Chairman, President and Chief Executive Officer, IBM said when his company discussed its expectations in April, it expected launch of z17, an enterprise mainframe, in the June quarter. 

"Given this was the strongest start to a mainframe program in our history, we expected Infrastructure revenue to decline low-single digits for the year, beginning this quarter. What played out was worse than our expectations, driven by a shortfall in our Z performance and the associated software stack, primarily in Transaction Processing," Krishna said. 

In the last few weeks of June, IBM said the company saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases. 

Infosys ADRs fell 3.91 per cent to $11.05. Wipro ADRs declined 3.16 per cent to $1.84. All eyes would be on Persistent Systems shares. In a July note, BNP Paribas identified any material weakness at top client IBM as a key risk to Persistent Systems' valuation.

"This dynamic impacted client buying patterns. While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization. In addition, clients were distracted with rapidly-evolving, industry-wide cybersecurity concerns in the quarter," IBM noted.

Krishna further said the conditions required perfect execution but his company faltered for the quarter. "We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall," he said.

Revenue for IBM came in at $17.2 billion for the quarter, up 1 per cent. Its 
Consulting revenue was flat, up 1 percent at constant currency (CC) terms. Software revenue grew 5 per cent. Infrastructure revenue fell 7 per cent. 

"We are still working to close our financial reporting for the quarter and our final results could be slightly different," Krishna told IBM investors.